How should I invest to finance my two year old's higher education?

Higher Education in India is getting scandalously expensive. Any half decent professional degree is likely to cost in the range of Rs. 20 lakhs to Rs. 30 lakhs fifteen years from now. This does not include outrageously expensive degrees like medicine or a US MBA, that cost crores even today and will be more expensive in the future.

Assume you want to save Rs. 25 Lakhs for your child's higher education 15 years down the line. You have a few investment choices. Let us run through them: (The calculation is quite useful for other sums as well. If you want to save a crore instead of 25 Lakhs, for example, you just need to multiply all investment by 4.)

The NSC/PPF/FD/Debt Fund
You could invest in a good long term bond like an NSC, which is government guaranteed and returns on an average about 8% per year. To get 25 lakhs in 15 years you can put in a one time investment of Rs. 7,90,000 in an NSC, and keep renewing it every five or ten years. It will grow to Rs. 25 Lakhs.

Another way to do the same thing would be to buy Rs. 7,000 worth of NSC every month for 15 years, and you will build about Rs. 25 lakhs in investments.

The advantage of this approach is that it is ultra safe and government guaranteed.

The disadvantage of this approach is that your money is locked for 5 years or ten years at a time. You cannot take it out at all. A second disadvantage of this approach is that NSC interest rates can change. When you have to renew after 5 or 10 years, you could face a situation where interest rates are low - say 5% or 6%. That could throw the entire plan out of gear.

PPF, bank FDs and long term bonds would work similar to NSC, though there are some differences in taxes charged on each. Simply stated, NSC and PPF are your best bond or fixed income options, closely followed by Debt Mutual funds. Fixed deposits are not good for long term investing because of the way tax works in India.

The Equity Mutual fund
You could also invest your money in long term equity Mutual Funds. To get 25 Lakhs in 15 years you can put in a one time investment of Rs. 3 Lakhs on an expected average return of 15% per year. Another way to do the same would be to start an SIP of Rs. 3,500 per month for 15 years.

The advantage of this approach is that it provides better returns, so the money you need to put in is lesser. Using an NSC you need to put in a one time investment of Rs. 7.9 Lakhs. With Equity Mutual Funds, just about 3 Lakhs would do. Using an NSC you will need a monthly investment of Rs. 7,000 for 15 years. With Equity Mutual funds Rs. 3,500 per month would do. A second advantage of Equity Mutual funds is that you get liquidity. You can withdraw your money or invest more money at any time. This is not the case with NSC and PPF, though it is possible with Debt Mutual Funds.

The disadvantage of using Equity Mutual funds is that you do not get guaranteed or safe returns. Returns from year to year can vary hugely. An Equity Mutual Fund can swing from -50% to +200% per year. That can be quite scary.

So what is the best way? It is balance. Mix it up. Use both. That is what I do.

Go with Rs. 2.5 Lakhs in NSC and Rs. 2.5 lakhs in Equity Mutual Funds. Or go with Rs. 2,500 per month in NSC and Rs. 3,000 per month in Equity Mutual Funds, and you have a good chance of making more than Rs. 25 lakhs for your child in 15 years.

You can write to us to set up a workable plan right away. And yes, avoid the Insurance based Children Plans. They don't work very well because they are basically the same as Equity Mutual Funds, only about four to ten times as expensive. They can look very attractive and responsible, but that is a neat mind trick played by advertisers, which you can learn more about by clicking here

Is a house a good Investment?

Its a dream to own a house. Your own roof and floor is absolutely essential in life. One of India's most prolific writer and thinker, Khushwant Singh, has written that in order to be happy one must have: "your own home. Rented places can never give you the comfort or security of a home that is yours for keeps. If it has garden space, all the better. Plant your own trees and flowers, see them grow and blossom, and cultivate a sense of kinship with them." (you can read the essay here)

We agree. One must buy a home to live.

But is a house a good investment?

Should one buy a house so that one makes good money?

That is an entirely different question, and we believe that on balance, a house isn't a good investment.

Here are a few reasons for you to think about:

1. The ticket size and risks are incredibly huge. Houses in most large cities in India cost around a crore or more these days. That translates into roughly a Rs. 1 lakh per month EMI over 20 years. It is a huge burden to pick up. If you buy a house for Rs. 1 Crore when you are thirty five, then you are effectively committed to paying Rs. 1 lakh per month till you are fifty five years of age. If the price of your house falls, or if you are unable to sell it, or if there is some problem with the builder or with the building, you will end up with a financial liability that will completely take over your life. It is the stuff nightmares are made of.

2. House prices fall. It is often missed, but it is true and can be seen these days: house prices fall, sometimes they fall off a cliff. What is worse, when house prices fall, a phenomenon called deflation takes over and buyers dry up. There is no reason for a person to buy a house you are selling if he believes that prices will fall in the next six months. Not only will prices fall, you will be unable to sell until prices bottom out and start rising again. This is a nerve wracking and very dangerous situation.

3. There are very few credible house buyers in general. As a rule of thumb, a person can buy a house that is about three to four times the annual salary. Which means only a person with an annual income of about Rs. 25 Lakhs and above can buy a house worth Rs. 1 Crore. There are very few such persons in India.

4. Transaction costs are huge, sometimes as high a 10% one way in broker fess and registration charges and legal fees, etc. This 10% does not include taxes due from you for capital gains. It is very expensive to both buy and sell a house.

The one advantage in investing in a house is that it allows you to borrow money cheaply. Cheap borrowing allows you to feel rich and also allows you to take advantage of rising prices because as prices rise, loans become less onerous. Cheap borrowing also boosts the returns you make. But you must be careful. Borrowing works both ways: it can boost the profits you make, and it can also magnify the losses you could end up with.

The clinching reason to not use a house (or a flat or a plot for that matter) as an investment is that even after all these troubles, houses are just no good as investments. Equity is far better. I live in Gurgaon and a lot of times people point houses to me and say: "that house was worth Rs. 35 Lakhs in 2005. Now it is 2 Crores." And they look at me waiting for me to be impressed.

Well, I am not impressed. Far from it, I am shocked. Rs. 35 Lakhs to Rs. 2 Crores in 12 years is a 15.6% return on investment. And this is the best return you get in the biggest boom in the biggest boom town in India, and this return is before taxes and broker costs and other charges.

Now compare.

Rs. 35 Lakhs invested in DSPBR Opportunities Fund on 1 Jul 2005 would be worth Rs. Rs. 2.5 Crores on 1 Jul 2017. DSPBR Opportunities is nothing extremely extraordinary that I have especially chosen. It is a good solid above average fund from a good solid fund house rated about 3.5/5 stars for performance. The best performing funds would have turned Rs. 35 Lakhs to more than Rs. 5 Crores. 

Remember, your gains from DSPBR Opportunities would be tax free, and you would be able to take out your money at the click of a mouse without the need to visit any broker. The DSPBR fund would cost nothing to buy or sell. On the other hand the flat would have cost you maintenance, interest, taxes and a whole lot of hassles.

There is simply no contest between the two investments. So yes, buy a house to live, but don't buy one as an investment.